Are we rushing into a new dotcom bubble?

Have we learned nothing from the 2000 dotcom bubble? Asking this question has become more significant than ever now even the big venture capitalists themselves start ringing the alarm bells. Over the past 5 years a steady $20 to $30 billion dollars worth of funding has found its way into the tech startup industry each year. Now looking at the second quarter of 2014 alone, nearly $14 billion dollars of venture capital has been reported – the highest amount since 2001. While this is nowhere as crazy as the $105 billion poured into startups at the height of the first bubble, venture capitalist Bill Gurley does note a trend of a much higher ‘burn rate’ of the funding raised. Gurley points here at Uber, one of the tech start-ups he owns a large stake in himself. As he puts it “It becomes an arms race, and that’s the real problem… If you say I’m going to be prudent and I’m not going to have a high burn rate’ and the other guy hires four times the sales force you do, it might not work for you.”

The ‘cash burning culture’ resulting from this arms race is said to be unsustainable over a longer period of time, yet investors are pouring money in start-ups with an ever increasing rate. Why?

I believe the answer lies in the fact that some of these tech ups are indeed blowing up to be the ‘next big thing’, resulting in profits large enough to keep investors in the game. Investors are opportunistic in nature and many of today’s VC’s have not experienced the 2000 dotcom bubble first handedly. Are we rushing into a new ‘burst of the bubble’ or will these tech start-ups actually live up to their potential? A question perhaps soon to be answered.

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2 responses to “Are we rushing into a new dotcom bubble?”

Very interesting thought. We need to be careful with this indeed. Just look at Twitter. Though their shares are doing well, the company itself is still not making any profit. It even had a loss of $145 million in the last quarter using the generally accepted accounting principles (GAAP).

However, Twitter does not use these standards, it is using an alternative method that has been criticised by many. This way, Twitter claims to have a profit of $12 million and revenue of $312 million in the second quarter of this year, which increases their share price.

Using accounting principles that are frowned upon is tricky and can give a misrepresented idea of the performance of a company, which is what went wrong in the internet bubble years ago. Whether the new internet bubble will happen I do not know either. Indeed, time will tell.

This is a very interesting question definitely, but I don’t think the big venture capitalists are sleeping. Perhaps they want to create a bubble to make fast profits and get out before the bubble eventually pops. Well, this might not be the case. I do not agree on the fact that there are many venture capitalists have not first handedly dealt with the dotcom bubble of 2000. It is only 14 years a go and generally VC’s are not in their teenage years or mid 20’s, but 50 or 60 years old. You should say that they have sufficient intelligence and experience to avoid a possible next bubble.

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